The Baltimore school system, failing to spend all of a state grant for educating disadvantaged 4-year-olds, was forced this summer to return $687,342.

The money reverted to the state Education Department after city schools failed to operate a dozen early-childhood centers under a $3.8 million grant during the last school year. The $687,342 could have provided programs for about 500 children.

State officials said the city failed to establish six new sites in the Extended Elementary Education Program and to finance six existing sites. The money was deducted after an exchange of memorandums that lasted nearly the full school year.

As early as last October, city officials sensed they would be unable to spend all of their program money, and they sent a letter to elementary principals advertising the program.

But Baltimore was in the first phases of administrative decentralization last year, and many schools exercised their option not to apply for program funds, said Maurice B. Howard, assistant superintendent for curriculum and instruction.

"The sad part," Dr. Howard said, "is we're crying poor and then not able to spend the money we have. We have a cadre of students eligible for services, and here they're not able to get them."

The legislation establishing the state program in 1978 specified that eligible schools also had to be eligible for Chapter 1, the federal government's main program for needy schools. Dr. Howard said many of the Chapter 1 schools had no room for the extended elementary program and that some principals and school improvement teams favored all-day kindergartens over the half-days in that program. "All-day kindergartens are all the rage," he said.

"We're working cooperatively with the city to make sure this doesn't happen again this year," said Tish Rennings, a state official.

The extended elementary grant for last year was intended to provide instruction for 2,580 pre-kindergarten students in 65 centers. State officials said the money reclaimed from Baltimore was used for extended elementary programs in other Maryland districts.